What Is The Conference Board (CB)?
The Conference Board (CB) is a member-driven economic think tank. The organization distributes information about management and the marketplace to over 2,000 businesses across various industries and geographies, via peer-to-peer meetings. Founded in 1916 this not-for-profit research organization is a widely quoted private source of business intelligence.
The CB's Chief Directives
Based in New York, with offices across Belgium, China, and Canada, the CB aims to delve into the issues which companies regularly grapple with daily. These everyday concerns may include top-line growth in a shifting economic environment and corporate governance standards. According to the Conference Board’s website, the primary agenda is to help leaders navigate the most significant issues facing business, to help these leaders better serve society at large. The group accomplishes this goal by reflecting the input and real-world challenges of its member-base.
The number of businesses the organization distributes to across various industries and geographies, via peer-to-peer meetings.
The purpose of the Conference Board's Business Cycle Indicators (BCI) is to provide ways for analyzing the expansions and contractions of the economic cycle. The Composite Index of Leading Indicators is one of three components of the BCI; the other two are the Composite Index of Coincident Indicators and the Composite Index of Lagging Indicators.
Since the leading-indicators component attempts to judge the future state of the economy, it is by far the most widely followed. But before we explore its components and the ways in which it is interpreted, let's take a look at some background of the overall BCI.
Early History of Business Cycle Indicators
After the disaster of the Great Depression, economists were eagerly searching for ways to detect the next economic downturn. The development of the BCI started in the 1930s as Arthur Burns and Wesley Mitchell of the National Bureau of Economic Research (NBER) began experimenting with the patterns showing up in the NBER's data. They called these patterns business cycles, and in their 1946 book "Measuring Business Cycles" described them as: "consist of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle".
This early research represents the beginning of the study of the business cycle by means of economic indicators. Much of the following development of this 'indicator approach' was pursued at the NBER under the supervision of Dr Geoffrey Moore, an economics researcher who developed the concept of leading, lagging and coincident business-cycle indicators, and is still considered the "father of the leading indicators".
By the late 1960s, the U.S. Department of Commerce was producing material resembling the model for the Board's current BCI. The CB became the official publisher of the BCI, taking over from the government, in Dec 1995. Today, it releases the BCI for Mexico, France, the United Kingdom, South Korea, Japan, Germany, Australia, Spain and, of course, the United States.
Methodology Behind Indexes of the BCI
The three BCI indexes are called composite indexes because they incorporate multiple data components. According to their report Using Cyclical Indicators (2004), the Board makes six considerations when choosing an appropriate cyclical component for any index. These six considerations are carried about with the following six statistical and economic tests:
- Conformity - The data series must conform consistently in relation to the business cycle.
- Consistent timing - The series must exhibit a consistent timing pattern as a leading, coincident or lagging indicator.
- Economic significance - Its cyclical timing must be economically logical.
- Statistical adequacy - The data must be collected and processed in a statistically reliable way.
- Smoothness - Its month-to-month movements must not be too erratic.
- Currency - The series must be published on a reasonably prompt schedule, preferably every month.
The report goes on to qualify these criteria: "By these standards, strictly applied, relatively few individual time series pass muster. No quarterly series qualifies for lack of currency. Many monthly series lack smoothness. Indeed, there is no single time series that fully qualifies as an ideal cyclical indicator."
So, since few single components meet all six criteria, the Conference Board compiles multiple components into each of the indexes of the BCI.
Methodology of the Index of Leading Indicators
The Index of Leading Indicators incorporates the data from 10 economic releases (which we review below) that traditionally have peaked or bottomed ahead of the business cycle. The exact formula for calculating changes in the leading index is rather involved but not necessary for understanding the indicator from our perspective here. (However, if you are interested, the formula can be found here on the Board's website).
Each of the 10 components is averaged, and a standardization factor is applied to equalize volatility. (You can find the current standardization factors here.) In 1996 the value of the Index of Leading Indicators was re-based to represent the average value of 100, and the CB releases the data on a monthly basis. Below are the ten components that make up the composite indicator (charts of each component can be found here).
The 10 Components:
- Average weekly hours (manufacturing): Adjustments to the working hours of existing employees are usually made in advance of new hires or layoffs, which is why the measure of average weekly hours is a leading indicator for changes in unemployment.
- Average weekly jobless claims for unemployment insurance: The CB reverses the value of this component from positive to negative because a positive reading indicates a loss in jobs. The initial jobless-claims data is more sensitive to business conditions than other measures of unemployment, and as such leads the monthly unemployment data released by the Department of Labor.
- Manufacturer's new orders for consumer goods/materials: This component is considered a leading indicator because increases in new orders for consumer goods and materials usually mean positive changes in actual production. The new orders decrease inventory and contribute to unfilled orders, a precursor to future revenue.
- Vendor performance (slower deliveries diffusion index): This component measures the time it takes to deliver orders to industrial companies. Vendor performance leads the business cycle because an increase in delivery time can indicate rising demand for manufacturing supplies. Vendor performance is measured by a monthly survey from the National Association of Purchasing Managers (NAPM). This diffusion index measures one-half of the respondents reporting no change and all respondents reporting slower deliveries.
- Manufacturer's new orders for non-defense capital goods: As stated above, new orders lead the business cycle because increases in orders usually mean positive changes in actual production and perhaps rising demand. This measure is the producer's counterpart of new orders for consumer goods/materials component (#3).
- Building permits for new private housing units: Building permits mean future construction, and construction moves ahead of other types of production, making this a leading indicator.
- The Standard & Poor's 500 stock index: The S&P 500 is considered a leading indicator because changes in stock prices reflect investor's expectations for the future of the economy and interest rates. The S&P 500 is a good measure of stock price as it incorporates the 500 largest companies in the United States.
- Money Supply (M2): The money supply measures demand deposits, traveler's checks, savings deposits, currency, money market accounts and small-denomination time deposits. Here, M2 is adjusted for inflation by means of the deflator published by the federal government in the GDP report. Bank lending, a factor contributing to account deposits, usually declines when inflation increases faster than the money supply, which can make economic expansion more difficult. Thus, an increase in demand deposits will indicate expectations that inflation will rise, resulting in a decrease in bank lending and an increase in savings.
- Interest rate spread (10-year Treasury vs. Federal Funds target): The interest rate spread is often referred to as the yield curve and implies the expected direction of short-, medium- and long-term interest rates. Changes in the yield curve have been the most accurate predictors of downturns in the economic cycle. This is particularly true when the curve becomes inverted, that is, when the longer-term returns are expected to be less than the short rates.
- Index of consumer expectations: This is the only component of the leading indicators that is based solely on expectations. This component leads the business cycle because consumer expectations can indicate future consumer spending or tightening. The data for this component comes from the University of Michigan's Survey Research Center, and is released once a month.
Methodology of the Index of Coincident Indicators
The Composite Index of Coincident Indicators includes four date sets of cyclical economic data. These components were chosen because they are generally in-step with the current economic cycle.
The economic data series are averaged for smoothness, and the volatility of each is then equalized using a predetermined standardization factor, which is updated once a year.
The Four Components
- Employees on non-agricultural payrolls: Released by the Bureau of Labor Statistics, this component is known as "payroll employment." Full-time, part-time, permanent or temporary workers are counted equally. This series is considered the most widely followed gauge of the health of the U.S. economy.
- Personal income, less transfer payments: This is a measure of all sources of income, adjusted for inflation, to measure real salaries and other earnings. Social Security payments are excluded. This measure adjusts wage accruals less disbursements (WALD) to smooth seasonal bonuses. The personal-income component measures both the general health of the economy and aggregate spending.
- Index of Industrial Production: Gas and electric utilities, mining, and manufacturing production output are measured on a value-added basis. Industrial data sources contribute values of shipments, employment levels, and product counts. This value-added measure has captured most of the movements in total industrial output.
- Manufacturing and trade sales: The data comes from the National Income and Product Account calculations and attempts to capture real spending.
Methodology of the Index of Lagging Indicators
The Index of Lagging Indicators is a made up of seven economic series that have historically registered a change after the change has taken place. The seven lagging components are averaged to smooth their results, and adjusted for volatility.
The Seven Components
- Average duration of unemployment: This represents the average number of weeks an unemployed person has been out of work. The value is inverted to indicate a lower reading during a recession and a higher reading during an expansion. This is a lagging indicator because people have a harder time finding a job after a recession has already begun.
- Inventories-to-sales ratio: The inventory-to-sales ratio is constructed by the Department of Commerce's Bureau of Economic Analysis (BEA) and represents manufacturing, wholesale and retail-business data. The ratio is adjusted for inflation. Increased inventory can mean sales estimates were missed, indicating a slowing economy.
- Change in labor cost per unit of output (manufacturing): Constructed by CB using various sources of employee compensation data in manufacturing, the input values come from organizations such as the BEA and the Board of Governors of the Federal Reserve. The final number represents the rate of change in employment compensation compared to industrial output. When the economy is in recession, industrial production often slows faster than labor costs.
- Average prime rate (banks): This component is compiled by the Fed's board of governors. Changes in the interbank loan interest rate tend to lag the overall economic activity because the Federal Open Market Committee sets this interest rate in response to economic growth and inflation.
- Commercial and industrial loans outstanding: Records the total amount of outstanding loans and commercial papers, once adjusted for inflation. The data comes from the Fed's board of governors. Because of the associated decline in corporate profits, the demand for loans tends to peak later than the overall economy. This component can lag a recovery by a year or more.
- Ratio of consumer installment credit to personal income: This ratio measures the relationship between consumer debt and income and comes from the Fed's board of governors. Consumer borrowing tends to lag because people hesitate to take on new debt until they are confident that their income level is sustainable.
- Consumer price index (CPI) services: This component comes from the Bureau of Labor Statistics. Increases in prices for consumer-related service products generally occur in the early part of a recession. The CPI represents prices that have already changed, so this component lags other economic indicators.
The Conference Board is perhaps best known for the Consumer Confidence Index® (CCI). This monthly report reflects prevailing business conditions and likely developments for the months ahead. It details consumer attitudes and buying intentions, with data broken down by age, income, and region.
The Conference Board categorizes its content according to various centers or spheres of concentration which face businesses. These divisions include:
- The Committee for Economic Development
- Corporate Governance
- Economy, Strategy & Finance
- Human Capital
- Marketing & Communications.
Each of these centers offers a unique set of valuable research and reference materials, blogs, white papers, and podcasts. However, perhaps the most valuable portal is to the Board's Data and Analysis. Users may find the most recent data for the CCI and for the Leading Economic Indicators, which was a government-released data set until 1995. Users will also find the Board's calendar of scheduled Economic Releases irreplaceable. The Board's data is a vital tool for industry and business leaders worldwide.
Real World Example
Throughout the year, The CB sponsors multiple worldwide conferences, which focus on a variety of themes and topics, such as:
- Employee benefits and compensation
- Talent management strategies
- Employee health care
- Executive coaching
- Joint ventures and strategic alliances
- Diversity and inclusion
- Merger integration
Finally, despite its high profile presence, the Conference Board maintains a strong apolitical posture, as per its charter, which mandates:
“No substantial part of the activities of the Corporation shall be the carrying on of propaganda, and the Corporation shall not participate in, or intervene in (including the publication or distribution of statements) any political campaign on behalf of (or in opposition to) any candidate for public office."
For example, the CB does not participate in any arrangement which can appear as their supporting or opposing a candidate. Further, they do not :
- Contribute to a campaign committee, a candidate, a political party, or a Political Action Committee.
- Publish or distribute written statements or make oral statements on behalf of or in opposition to a candidate.
- Nor do they pay salaries or expenses of campaign workers.
- Allow the use of its telephones, computers, facilities or other assets for political campaign activity.